The intermediaries’ legislation, commonly known as IR35, has been in force since 2000 but HM Revenue and Customs view was that the rules were largely being ignored by contractors who were supplying services within the definition of the rules which deemed the contractor should pay employment rather than business taxes.
Contractors who supply labour and services to small companies remain liable for tax debts under IR35 and should either, operate the IR35 rules or retain evidence to prove that the rules do not apply to their contracts.
The 2020 amendment – The Off-Payroll Working Rules
The amendment to the intermediaries’ legislation which comes into force in April 2021, brings large hirers in scope of the rules when they engage contractor-directors via their own limited company. When hirers make the decision on whether IR35 rules apply to a contract, they are not taking into account whether or not a contractor has a substantial client base, which is often the reason contractors determine that they need not operate IR35, and usually rightly so.
HMRC will often use the term ‘in business on their own account’ to describe a contractor who falls outside the definition of the rules on when IR35 applies to a contract.
The CEST tool provides a useful insight into the factors that HMRC perceives to matter when determining whether a contractor is working in business on their own account, or would be engaged as an employee, if their company was not involved in the contract.
The main factors are financial risk, which means making a capital investment in the company and/or the opportunity to make a profit and equally risk making a loss. Another is the level of control, or the right to control, the way a contractor carries out the requirements of the contract or duties.
Mutuality of Obligation
This is a mainstay of contract law and is used when determining when an employment contract is formed between a worker and hirer. However, it is not used when determining whether IR35 applies to a contract, partly because the rules look at employment status for tax purposes only, i.e. there is no contract law which has ever determined a contractor who operates through his own limited contract to be an employee.
As an umbrella company we provide an alternative to contractors who usually operate through their own limited company, when hirers determine that IR35 applies and makes a decision to not to use contractors to supply labour or services. While our payroll bureau manages all the PAYE payroll requirements and can be used by contractors or hirers.
For contractors who operate inside or outside IR35, our partner organisations provide a range of services and support from a full range of accountancy services to help with an IR35 determination and any issues arising from that.